Which of the following statements is correct about completing a work sheet in relation to adjusting journal entries and prepaid expenses?

• A. Prepaid expenses are always expensed in full when initially paid, so no adjustment is needed on the work sheet.
• B. Adjusting entries for prepaid expenses are optional and do not affect the accuracy of the financial statements.
• C. The work sheet is only used to record closing entries, not adjusting entries.
• D. Adjusting entries for prepaid expenses are recorded on the work sheet before preparing financial statements.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of prepaid expenses. Prepaid expenses are payments made in advance for goods or services that will be consumed or used in future periods. Examples include prepaid rent, insurance, or subscriptions.
2. Step 2: Recognize the purpose of adjusting entries. Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recorded in the period they are incurred, adhering to the accrual basis of accounting.
3. Step 3: Learn how prepaid expenses are treated. Initially, prepaid expenses are recorded as assets because they represent future economic benefits. As the benefits are consumed over time, the prepaid expense is gradually expensed through adjusting entries.
4. Step 4: Understand the role of the work sheet. A work sheet is a tool used in the accounting process to organize and adjust account balances before preparing financial statements. Adjusting entries, including those for prepaid expenses, are recorded on the work sheet to ensure accurate financial reporting.
5. Step 5: Confirm the correct statement. The correct statement is: 'Adjusting entries for prepaid expenses are recorded on the work sheet before preparing financial statements.' This reflects the importance of adjustments in ensuring the accuracy of the financial statements.